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Where do the profits go? |
.. Geoff, Oct 20/05 |
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When a business makes money, it is called a profit. Profits are, quite simply, sales minus (cost of goods sold + expenses).
Where do Frontier's profits go?
First of all, the government gets almost half of any company's profits. (We can all feel proud to finance Canada's schools, hospitals and infrastructure.) That's why companies usually talk about "profit after tax."
When we started the business in 1984, we didn't have much but big ideas. We borrowed money, found customers, took orders, built equipment and sold it. The first year was not particularly profitable -- the company made about $6,000, after paying the three founders of Frontier a grand total of $26,000. (That's not "each", by the way--it worked out to about $3/hour.) But that first $6,000 profit was good. It allowed us to buy shop and office equipment, and keep going.
The next year Frontier's after-tax profit was $13,000. Frontier has been profitable most years since then.
There were two years where we were not profitable. In 1990 we barely broke even, and we lost money in 1992. There was a major downturn in the economy at that point. Instead of laying off people, we all agreed to cut down to 4-day weeks. When a company doesn't make a profit, cutbacks are required. We would prefer never to find ourselves in this situation again.
It takes lots money to run a business! We have several million dollars worth of land and buildings, shop and office equipment, and inventories. Most of this is purchased with borrowed money. Banks don't lend all that a business needs--only a part of it. We have to match the bank's lending with retained earnings (prior years' profits reinvested in Frontier). On real estate, the bank puts up 75% and Frontier puts up 25%; on inventories Frontier puts up 60%.
We also finance our customers. We buy engines and equipment (sometimes months ahead of time), build and configure them (paying our shop employees), add lots of expensive bits, then sell the package to our customer. Our customer might take 30 or 60 days to pay his bill, but we have already paid our suppliers and employees. Again, the bank finances some of this process, but Frontier finances the rest.
In 1994 we made a big leap and bought our first building for $1 million. This was possible because the retained earning from our first 10 years of operation were enough (barely) to make the down payment, while continuing to finance our inventories and other assets.
In 2001 we were able to buy the Edmonton property. In 2005 we purchased our Calgary building.
Will we ever get out of debt? It's possible, but... Coca-Cola has been in business since 1919 and they are still in debt. John Deere was incorporated in 1868 and they are still in debt. In fact, any business on the stock market is in debt to their shareholders. Whenever any aspect of a business grows, it takes money, and that money has to come either from a bank or from shareholders.
So making a profit is important. It allows Frontier to stay in business and keep growing. Without profits, we would have to shrink--never a pleasant experience.
Hopefully this answers the question "where do the profits go?" and gives some insight into how Frontier operates and stays healthy.